Specialty to be tested by rising costs

While retailers are already grappling with cautious consumers and the effects of floods and a cyclone,
Specialty Fashion Group
has warned it will face new challenges of rising labour costs in China and soaring yarn prices this year and beyond.

The women’s fashion retailer, which counts Millers, Katies and more recently La Senza among its brands, suffered a 37 per cent fall in net profit to $16.8 million in the year’s first half from $26.6 million a year ago.

Revenue of $312.7 million and earnings before interest, tax, depreciation, and amortisation of $34.1 million were in line with the profit warning a month ago, reflecting a tough trading environment. “The depth and length of discounting over the past 18 months has been unprecedented since I have been in retailing," chief executive
Gary Perlstein
said. “Our customers bought our product but paid less for it."

He said rising interest rates and cool weather patterns proved difficult in the first half. “We anticipated that November and December would be strong but literally after the RBA decision came through, we saw things fall off a cliff for the following two weeks and then flattening out," he said.

Apparel retailers would have to manage the inflationary impact of higher yarn prices and rising Chinese labour costs, Mr Perlstein said. The group’s direct sourcing strategy would help manage wage increases in China and Bangladesh, but with up to 70 per cent of a garment’s cost related to material, the rising cotton price would have an effect, he said.

Mr Perlstein did not provide any full-year guidance but said in the first six weeks there had been a higher dollar spend per customer and less discounting. The group closed 30 sites but added 73 stores, taking its network to 880 at the end of the first half. It plans to open 10 La Senza sites this half.

The company has a strong balance sheet with cash of $16.9 million and no outstanding debt, which will provide adequate capacity to fund the refurbishment of the Millers and Katies networks as well as roll out the La Senza brand.

Deutsche Bank analysts believe the plan to open 100 La Senza stores over three years under licence from US-based Limited Brands gives the ­company exposure to an attractive category of intimate apparel with ­relatively defensive earnings.